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Cenveo Reports Second Quarter 2017 Results

Thursday, August 03, 2017

Press release from the issuing company

Second Quarter 2017 vs. Second Quarter 2016 Overview

  • Net sales of $355.0 million compared to $410.1 million.
  • Net loss of $1.9 million compared to net income of $47.6 million.
  • Adjusted EBITDA(1) of $30.2 million compared to $37.5 million.
    • Q2 2016 included one-time benefits of $6.0 million in connection with the exit of our coating operation
  • Net cash provided by operating activities of continuing operations of $0.7 million compared to $7.7 million.
  • Gross margin of 16.1% compared to 16.7%.
  • Interest expense of $19.5 million compared to $21.5 million.

(1) Adjusted EBITDA is a Non-GAAP Measure. See Use of Non-GAAP Measures and the tables that follow for a reconciliation of GAAP to Non-GAAP Measures.

Management Commentary
"Given the challenging operating environment we experienced during the first half of the year, we are generally pleased with our Adjusted EBITDA performance for the quarter compared to the prior year, which included one-time benefits in connection with the closure of our coating operation.  Our consolidated results for the second quarter of 2017 were adversely impacted by weakness in our direct mail business primarily driven by softness from our financial institution customers due to lower customer acquisition related mailings.  These results were partially offset by the positive effects of our 2017 Profitability Improvement Plan. To date, we are very pleased with the implementation progress and we are now on pace to exceed our original $50 million target that we announced earlier this year.  During the second quarter 2017, we retired the remaining portion of our 7% Convertible Notes to complete our 2017 refinancing initiative. Also, as we previously announced, Cenveo will be transferring its stock exchange listing to the Nasdaq Global Market ("NASDAQ") from The New York Stock Exchange ("NYSE"). Cenveo shares will begin trading as a Nasdaq-listed security on August 8, 2017, and will continue to trade under the symbol CVO," said Robert G. Burton, Sr., Chairman and CEO of Cenveo.

Financial Results
Net sales in the second quarter of 2017 were $355.0 million compared to $410.1 million in the same period last year, a decline of 13.4%. The Company generated net sales of $736.9 million for the six months ended July 1, 2017, compared to $850.6 million for the same period last year, a decline of 13.4%. The sales decline was primarily driven by: (i) lower sales in the envelope segment, primarily due to lower demand in office product and wholesale envelope product lines primarily due to marketplace trends and lower direct mail demand primarily from our financial institution customers; (ii) lower sales volumes in the commercial print group and the publisher services group, primarily driven by lower customer demand and continued pricing pressures; and (iii) lower sales in the label segment, primarily due to the decision to exit our coating operation which was completed in the second quarter of 2016, and lower sales driven by product mix changes.

Operating income was $11.4 million for the three months ended July 1, 2017, compared to operating income of $21.6 millionin the same period last year, a decline of 47.3%. Operating income was $21.4 million for the six months ended July 1, 2017, compared to operating income of $38.6 million for the same period last year, a decline of 44.6%. The declines in both the three and six months ended were primarily due to lower gross profit resulting from lower sales volumes, the impact of the decision to exit the coating operation, and higher restructuring and other charges resulting from the 2017 Profitability Improvement Plan, including the announced closure of two facilities. These declines are partially offset by the benefit of lower selling, general and administrative expenses due to our cost reduction initiatives in connection with the 2017 Profitability Plan and lower commission expense due to lower sales volumes. Non-GAAP operating income was $18.1 millionfor the three months ended July 1, 2017, compared to non-GAAP operating income of $24.0 million for the same period last year.  Non-GAAP operating income was $37.3 million for the six months ended July 1, 2017, compared to $47.5 million for the same period last year. A reconciliation of all non-GAAP figures are reported in the tables below.

For the three months ended July 1, 2017, the Company had a loss from continuing operations of $1.9 million, or $0.22 per diluted share, compared to income of $50.9 million, or $5.15 per diluted share, for the same period last year. For the six months ended July 1, 2017, the Company had a loss from continuing operations of $10.5 million, or $1.23 per diluted share, compared to income of $63.9 million, or $6.43 per diluted share, for the same period last year. Income during 2016 was primarily driven by gains on the early extinguishment of debt of $51.3 million and $72.9 million during the three and six months ended July 2, 2016, respectively. Non-GAAP loss from continuing operations was $1.7 million, or $0.19 per diluted share, for the three months ended July 1, 2017, compared to income of $2.5 million, or $0.25 per diluted share, for the same period last year.  Non-GAAP loss from continuing operations was $1.8 million, or $0.20 per diluted share, for the six months ended July 1, 2017, compared to income of $1.5 million, or $0.15 per diluted share, in the same period last year. A reconciliation of (loss) income from continuing operations to non-GAAP (loss) income from continuing operations is presented in the attached tables.

Net loss was $1.9 million for the three months ended July 1, 2017, compared to net income of $47.6 million for the same period last year. For the six months ended July 1, 2017, net loss was $10.5 million, compared to net income of $58.8 millionfor the same period last year. Adjusted EBITDA was $30.2 million for the three months ended July 1, 2017, compared to $37.5 million for the same period last year. Adjusted EBITDA was $61.4 million for the six months ended July 1, 2017, compared to $72.4 million for the same period last year. The significant drivers in the change in our Adjusted EBITDA were: (i) the expected impact associated with the disruption in our office and wholesale products and the exit of our coating operation accounting for a reduction of approximately $9.0 million and $15.0 million for the three and six months ended July 1, 2017, respectively, and (ii) lower direct mail demand primarily from our financial institution customers. The declines were partially offset by our profit improvement initiatives, which accounted for an increase of approximately $6.1 million and $11.1 millionfor the three and six months ended July 1, 2017, respectively, primarily driven by our operational efficiency projects and position reductions across our operating platform.

Cash flow provided by operating activities of continuing operations for the second quarter 2017 was $7.1 million, compared to $19.2 million for the same period last year. Cash flow provided by operating activities of continuing operations for the six months ended July 1, 2017, was $0.7 million, compared to $7.7 million for the same period last year. The declines in both periods were primarily due to changes in working capital, particularly the timing of payments to vendors and higher inventories due to inventory needs during plant consolidations, partially offset by sales to and collections from our customers.

At July 1, 2017, cash and cash equivalents totaled $7.1 million, compared to $5.5 million at December 31, 2016. Total outstanding long-term debt, including current maturities, was approximately $1.0 billion as of July 1, 2017, an increase of $20.6 million from December 31, 2016, primarily due to net borrowings on our asset-based revolving credit facility, as well as the initiation of certain equipment financings. During the second quarter of 2017, the remaining $5.5 million principal balance of 7% Convertible Notes was redeemed in full.

2017 Outlook
Our first half results were impacted by several known challenges including trends in the office product and wholesale envelope market and our decision to exit our coating operations. Those anticipated items now combined with lower direct mail envelope volumes during the first half of the year have affected our ability to achieve our net sales guidance for 2017 while making the achievement of our Adjusted EBITDA guidance more challenging.  However, we are encouraged by recent customer activity within our direct mail product line. We also now believe we will realize more than our original $25 million of profitability improvements during this year. The potential for the realization of incremental cost savings along with an improvement in our direct mail volumes, which must return to prior year levels during the back-half of the year, would allow us to achieve our Adjusted EBITDA guidance for 2017. We look forward to discussing this update further on tomorrow's conference call.

 

 

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